What Effect Will Trump’s Relationship With Putin Have On The US Economy?

U.S. President-elect Donald Trump during his 2016 presidential election campaign made several suggestions that he would alter the nation's policy to encourage a more amicable and harmonious relationship with Russia and its president, Vladimir Putin. U.S.-Russian economic relations have deteriorated in recent years due to conflicts of a geopolitical nature involving the Ukraine, Syria and NATO defense positioning in Europe.

It's unclear whether apparent goodwill between Trump and Putin will be sufficient to overcome considerable challenges that have crept up for diplomacy between the two nations in recent years. However, the prospect of improved relations is an encouraging sign that may yield economic dividends for both countries in addition to their other main economic partners.[1]

Who is Vladimir Putin?

Russian President Vladimir Putin began his career in the 1970s as an officer in Russia's KGB state intelligence service. He worked with the KGB for a period in East Germany. In the 1990s, he worked for the City Council of St. Petersburg, and eventually worked as first deputy head of the presidential administration under Boris Yeltsin. In 1999, Yeltsin appointed Putin as prime minister. Later that year, Yeltsin resigned and appointed Putin as president.[2]

Putin was re-elected through 2008 before serving again as prime minister. He was then re-elected president in 2012.[3]

How Influential Is Putin in Russia?

Since his rise to power, Putin has collected rivals on both the left and right extremes of the political spectrum, but none have been able to seriously challenge his control of power. There have even been several instances where rival political challengers or renegade businessmen have been arrested or even assassinated, pointing to the suggestion that Putin, a strong man, was behind the plots.[4]

Some observers have indicated they believe Putin has made a pact with leaders of Russian oligarchies that their businesses won't suffer undue interference from the state as long as they don't attempt to foment challenges against Putin in Russian politics. If true, the strategy seems to be working, because he's maintained power in Russia as president and prime minister for 16 years. This is longer than any other leader since the dismantling of the Soviet Bloc in 1989.[4]

Trump's Relationship With Putin

During the 2016 U.S. presidential campaign, there were many insinuations about Donald Trump's alleged connections with Russia and dangerous friendship with Putin. The two men expressed a mutual admiration for one another, but Trump denied that they had met or had had any direct relationship. However, given the somewhat-closed business community in Russia, some analysts have claimed that Trump, through his business interests, is not far removed from Putin and maintains close contacts with individuals and investors within his circle of influence.[5]

Mentions have also been made about the work of Trump's former campaign manager, Paul Manafort, who previously worked for the Russian-backed former Ukrainian president Viktor Yanukovych. Similarly, there have been mentions of Trump adviser Carter Page, who has had holdings in the Russian energy sector.[5]

Trump's Business Relationships and Investment Ties To Russia

Despite the many claims, Trump does not appear to have any substantial direct investments in properties or interests located in Russian territory. His campaign claimed that he sold all his stock holdings of U.S. and other nation's companies in June 2016, before the election.[6]

The connections Trump does appear to have are with Russian investors who have taken stake or made capital injections into some of his other prominent investments—mostly real estate ventures—that he has around the world. "Russians make up a pretty disproportionate cross-section of our assets. We see a lot of money pouring in from Russia," Trump's son, Donald Trump Jr., reportedly stated during a real estate conference in 2008.[7]

One venture in Russia that Trump did have success with was selling the rights to his Miss Universe Pageant in 2013 to Russian businessman Aras Agalarov for US$14 million. Agalarov also reportedly showed interest in a plan to build a Trump Tower in Moscow, but that project hasn't materialised.[7]

Russia, U.S. Bilateral Trade: Where Does It Intersect?

A warming of relations between the U.S. and Russia, if that is possible, could open up promising prospects for growing bilateral trade between the countries. The U.S. has the world's largest economy, while Russia's economy is the 12th largest. In 2015, the U.S. and Russia did US$24 billion in bilateral trade, down from more than US$40 billion in 2011. The U.S. was Russia's 11th biggest destination for exports, while Russia was not in the top 30 of U.S. export destinations. [8]

The U.S.'s top imports from Russia are fuel oils, petroleum, fertilisers, uranium and steel. Top U.S. exports to Russia are aircraft and components, industrial equipment, automobiles and auto parts, drilling equipment and pharmaceuticals. Analysts note that bilateral trade between the U.S. and Russia has been adversely affected by sanctions against Russia. The sanctions have been estimated to cost Russia approximately US$100 billion in trade of goods and services, and a similar amount for the U.S. and Europe.[9]

U.S. - Russia Military Versus Commercial Interests

The U.S. and Russia have clashed on several global security matters since Putin took power, promoting the continuation of a decades-long adversarial relationship between the two countries. The most prominent of those clashes has surrounded the Russian invasion and annexation of the Crimean region in the Ukraine in 2014. Russia has also reacted to the reinforcement of NATO missile defense systems in Eastern Europe, and joint military exercises between the U.S. and NATO partners in that region.[10]

Tension between Russia and the U.S. has also been heightened following Russian intervention in the Syrian civil war. Russia has sided in defense of Syrian President Bashar al-Assad against U.S. and European calls that al-Assad step down from power.[10]

U.S. Business Interests In Russia

Since the end of the Soviet regime in the 1980s, several U.S. businesses have worked to establish firm footings in Russia and in former Soviet republics. Prominent U.S. companies doing business in Russia include the following:

Russian Business Interests

Russian business interests have remained concentrated during the Putin years under a series of oligarchies that control various sectors. Many of Russia's top companies are in the energy sector due to the country's abundant oil and gas supplies.

Potential Points of Contention

Ukraine, Crimea

During his campaign, Trump took a non-committal position regarding U.S. policy on Crimea. He suggested that he may consider allowing Russia's annexation of the region to stand, and possibly consider lifting U.S. sanctions on Russia for the action.[13]

Trump was a vocal critic of President Barack Obama at the time of Russia's move, because of Obama's alleged weakness in allowing the action to take place. Since then, Trump has softened his stance on Russia, noting that an attempt to remove Russia forcibly from Crimea would risk starting "World War III." While not offering a guarantee that he would lift the sanctions, Trump said he was "going to take a look" at recognising Crimea as Russian territory.[13]

Syria

The situation in Syria has been a source of disagreement and potential conflict between the U.S. and NATO. Syria is considered strategic by Russia, because it has provided Russian naval support at its port in Tartus. That, in turn, provides access to both Middle Eastern trade and Mediterranean shipping. Additionally, a U.S. proposal to restrict the use of airspace in Syria raised concerns that the U.S. and the West could come into direct conflict with Russia as it tries to bomb rebel positions within that country.[14]

Trump's election and warmer relations with Russia are seen as possibly easing tensions between the two nations in the Middle East. During the 2016 presidential election campaign, Trump suggested that Russia and the U.S. could consider working together in Syria to quell civil war hostilities and combat terrorist groups operating from Syrian territory.[14]

Europe

Trump has made controversial comments suggesting that he would loosen ties with NATO ally nations and possibly demand that they pay more to the organisation for security arrangements. The statements raised some alarm among European leaders, but since that time, some NATO chiefs have expressed confidence that Trump's administration doesn't plan on abandoning U.S. security arrangements with the organisation.[15]

China And Greater Asia

Russia has taken the opportunity of U.S. and European sanctions to deepen its trade and business ties with China and some other Asian economies. It is unclear whether improved relations between the U.S. and Russia would dilute the intensity of Russia's efforts to fortify ties with Asia.[16]

Some analysts have suggested that Trump's pledge to abandon the Trans-Pacific Partnership negotiated by President Obama could open opportunities for Russia to do greater trade in the Pacific region.[16]

Trade Sanctions

After the Russians invaded and annexed the Ukraine's Crimea region, the U.S. and Europe imposed trade sanctions that are costing Russia billions of dollars annually. As a response, Russia reduced its purchases of European and U.S. goods, particularly agricultural products. However, that move had negative consequences and helped raise inflation in Russia to more than 17%.[17]

The sanctions also caused international investors to write down the value of Russian assets by around 10%. Overall, the sanctions were estimated to have depressed the Russian GDP by 1.5 percentage points. Russia's economy contracted by about 4% to around US$1.3 trillion in 2015 due to slumping oil prices and the impact of the sanctions.[17]

Market Implications Of Improved Relations

If it does occur, the warming of relations between Moscow and the U.S. could have positive implications, particularly for oil, energy and other commodities-related sectors. This is because it could open Russia up to:

a resumption of private investment in the oil industry,

greater stability in Middle Eastern transportation of oil supplies,

and increased growth and commerce in metals, and agricultural commodities.

The European banking sector would also stand much to gain because it suspended a lot of business with Russia because of sanctions imposed during the Ukraine crisis.[18]

The accompanying increased growth in Russia, and stability in European and Russian relations, could have positive side effects for other sectors that do business in the region. An intensification of trade and business in the region would also likely strengthen the Russian ruble and the euro, but may be neutral for the dollar. This is because the U.S. is a net importer of Russian goods, and investment flows would tend to move, at least initially, in the direction of development in Russia.[19]

Impact On The U.S. Economy

Business and bilateral investment between the U.S. and Russia has diminished because of a continued distrustful and at times adversarial relationship. U.S. direct investment in Russia dropped to about US$9 billion in 2015 from more than US$20 billion in 2009.[20]

In 2016, U.S. investment in Russia is less than 1% of the U.S. total of more than US$5 trillion around the world. Russian direct investment in the U.S. totals around US$8 billion, which represents about 2% of Russia's US$404 billion in foreign investment around the world.[21]

Stronger relations could offer an opportunity for increased bilateral trade and investment between the two countries. It could also provide a backdrop of stability for a decline in global oil prices, which could bolster the U.S. economy. Specific sectors that may see an immediate benefit from thawing relations and increased exports include agriculture, technology and oil equipment, all of which have been hurt by the sanctions.[22]

Summary

The U.S. has displayed a contradictory relationship with Russia in the years since the breakup of the Soviet Union. The Western nation has alternately looked upon the country as a potential friend, ally and investment partner, and also feared its resurgence as an autocratic state or global communist power.

Based on statements by both Trump and Putin, it's possible to imagine warming relations between the countries during a Trump administration. However, the two nations will need to navigate and disarm a minefield of existing and potential conflicts in order to guarantee that relations will move in the direction of progress.

Both governments may have to overcome potential objections within their respective societies and with partners in Europe. If they are able to succeed in that, though, there could be sizable economic returns for both countries, and for their primary partners and the global economic community.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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